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Portfolio Choice And Asset Pricing With Nontraded Assets

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  • SVENSSON, L.E.O.

Abstract

This paper examines portfolio choice and asset pricing when some assets are nontraded, for instance when a country cannot trade claims to its output on world capital markets, when a government cannot trade claims to future tax revenues, or when an individual cannot trade claims to his future wages. The close relation between portfolio choice with and implicit pricing of nontraded assets is emphasized. A variant of Cox, Ingersoll and Ross's Fundamental Valuation Equation is derived and used to interpret the optimal portfolio. Explicit solutions are presented to the portfolio and pricing problem for some special cases, including when income from the nontraded assets is a diffusion process, not spanned by traded assets, and affected by a state variable.

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Bibliographic Info

Paper provided by Stockholm - International Economic Studies in its series Papers with number 417.

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Length: 33 pages
Date of creation: 1988
Date of revision:
Handle: RePEc:fth:stocin:417

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Keywords: financial market ; pricing;

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References

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  1. Richard, Scott F., 1975. "Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous time model," Journal of Financial Economics, Elsevier, vol. 2(2), pages 187-203, June.
  2. S. Fischer, 1974. "The Demand for Index Bonds," Working papers 132, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Adler, Michael & Detemple, Jerome B, 1988. " On the Optimal Hedge of a Nontraded Cash Position," Journal of Finance, American Finance Association, vol. 43(1), pages 143-53, March.
  4. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
  5. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
  6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
  7. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  8. Duffie, Darrell & Jackson, Matthew O., 1990. "Optimal hedging and equilibrium in a dynamic futures market," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 21-33, February.
  9. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  10. Bernard Dumas, . "Pricing Physical Assets Internationally," Rodney L. White Center for Financial Research Working Papers 12-88, Wharton School Rodney L. White Center for Financial Research.
  11. Mayers, David, 1973. "Nonmarketable Assets and the Determination of Capital Asset Prices in the Absence of a Riskless Asset," The Journal of Business, University of Chicago Press, vol. 46(2), pages 258-67, April.
  12. Bernard Dumas, 1988. "Pricing Physical Assets Internationally," NBER Working Papers 2569, National Bureau of Economic Research, Inc.
  13. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
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Cited by:
  1. Pierpaolo Pattitoni & Marco Savioli, 2011. "Investment Choices: Indivisible non-Marketable Assets and Bounded Rationality," Working Paper Series 07_11, The Rimini Centre for Economic Analysis.
  2. Miguel Palacios, 2010. "Human Capital as an Asset Class: Implications from a General Equilibrium Model," Working Papers 2011-016, Human Capital and Economic Opportunity Working Group.
  3. Hans Andersson & B. Sailesh Ramamurtie & Bharat Ramaswami, 1995. "An intertemporal model of consumption and portfolio allocation," Working Paper 95-15, Federal Reserve Bank of Atlanta.
  4. Hugo Benítez-Silva, 2003. "Labor Supply Flexibility and Portfolio Choice: An Empirical Analysis," Working Papers wp056, University of Michigan, Michigan Retirement Research Center.

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